MEDC Feeling the Heat for Corporate Welfare Deals Coming Home to Roost

Corporate welfare is causing major budgetary woes for the state of Michigan. The sum of refunds from unspecified tax credits handed out in the past is estimated to exceed $9 billion in the years to come. The credits were given through the Michigan Economic Development Corporation (MEDC) as incentives for businesses to create or retain jobs.

Meanwhile, the agency continues to operate amidst complaints from lawmakers, reporters and others about its lack of transparency. An objective means of determining the benefits of the credits, as measured in the number of jobs produced or retained, has not been forthcoming, and the public can only make educated guesses as to which businesses are claiming the credits.

“The MEDC made an interpretation of tax law (in 2009) that has prevented residents from knowing which companies are cashing in on credits,” said James Hohman, assistant director of fiscal policy with the Mackinac Center for Public Policy. “The state has offered billions in credits and reporting on this should be basic transparency.”

Rep. Jeff Irwin, D-Ann Arbor, said the lack of transparency is a bipartisan concern.

“They changed the rules so that, even though this is a public board, it can hide behind this practice,” Irwin said. “We don’t need to see their tax returns; we just need some basic information. Then the new administration came in, but it has not been helpful at fixing this.”

“As legislators, I and others are frustrated by the fact that we can’t get data,” Irwin continued. “Members on both sides of the aisle agree that we need to have transparency. This is information the public has a right to know, the news media has a right to know and the lawmakers have a right to know.”

The tab for the credits in fiscal year 2015 has run up to $681 million and it is estimated to be $807 million for fiscal year 2016. There are several billion dollars more in credits that will likely be claimed in subsequent years.

The credits are the primary cause of a $532 million dip in expected state revenues. To deal with this immediate situation, Gov. Rick Snyder has authorized roughly $106 million in spending cuts to the current-year budget. He is also expected to shift $250 million of a surplus in the School Aid Fund to the General Fund to further offset the shortfall. It is assumed the estimated cost of the credits will be figured in as the Legislature begins work on the next fiscal year budget.

The tax credits creating the current situation were handed out during the administration of former Gov. Jennifer Granholm, and the educated guess is that they went to the Big Three auto manufacturers. Snyder and the Legislature put an end to the refundable tax credits in 2011, but have continued to maintain the agency.

Some legislative Republicans have been advocating that the state get rid of it. Rep. Pat Somerville, R-New Boston, has been one of them.

“It goes back to the issue of why making sure you’re pursuing good public policy is so important,” Somerville said. “This (the tax credit snafu) is an example of what happens when people in office only focus on what might have looked good short term without considering the long-term impact. Improving the economic environment is something we should be trying to do with tax policy. We need to put an end to all of this nonsense of picking winners and losers.”

Rep. Todd Courser, R-Lapeer, has introduced House Bill 4194 to do just that.

House Democrats, however, take the position that the agency should be forced to transparently prove which of its incentives are successful and which aren’t. They also say the state – acting on behalf of the taxpayers – should be getting its incentive dollars back from businesses that fail to create or retain the required number of jobs.

House Democrats also say that the current revenue shortfall is not caused by the tax credit refunds alone, but by a combination of the credits and Snyder’s tax cuts for businesses.

“So this governor comes in and totally redesigns tax policy in 2011, and when he does that, he knowingly kept the credits in place and now they’ve come back with this kind of impact,” Irwin said. “To say this was totally unexpected is not true. In 2011 the House Fiscal Agency said that if they reduce the business taxes but continue to fulfill the credits that businesses can redeem, it would lead to a trough that would result in us being $180 million in the hole. It is not true when they claim this was unforeseeable.”

Dave Murray, Snyder's spokesman, responded to Irwin's comments with an explanation of the governor’s position.

“Gov. Snyder has often said that he doesn’t like the idea of tax credits, and one of the challenges has been the transparency and the ability to see what might be coming,” Murray said. “Taxpayer information is private information. People in elected positions are not allowed to see taxpayer information.”

“The governor has said we want businesses to be successful so they can grow and create more and better jobs,” Murray continued. “That’s been happening. But he has also raised concerns about tax credits for years, which is why he has transitioned away from them since taking office. Some of the organizations involved are open to talking about how they can provide greater visibility and work more closely with the state. We expect there to be ongoing dialogue about the legacy tax credits moving forward that will help with planning.”

For nearly 20 years, the Mackinac Center for Public Policy has been a critic of MEDC programs, and the MEGA tax credits in particular. In a recent post, the Mackinac Center noted:

The Mackinac Center has done hundreds of news articles and commentaries about the lack of jobs generated by the Michigan Economic Growth Authority tax credit program, which was eliminated in 2011 but is in the news because the state budget is taking a hit because of past deals.

A 2009 study and 2005 study found that state corporate welfare programs exaggerated job claims and cost more money than they were worth. Numerous reports from the Michigan Auditor General found similar results.